Renovia | Painting Condos

Maintenance vs Capital: Where Painting Fits in a Condo Association

August 17th, 2017 Posted by Uncategorized 0 comments on “Maintenance vs Capital: Where Painting Fits in a Condo Association”

Weighing Your Options

Aes­thet­ic appeal is a major fac­tor in deter­min­ing the val­ue of a prop­er­ty. As a con­struc­tion man­ag­er or the man­ag­er of a con­do asso­ci­a­tion, you have to deter­mine when it is time to repaint con­do build­ings. How­ev­er, the cost of main­te­nance must be weighed against the expec­ta­tions of the result­ing increase and the prop­er­ty val­ue of con­do build­ings.

Embark­ing on repaint­ing and oth­er major main­te­nance work based on the apart­ment main­te­nance time­line is a cost­ly under­tak­ing. The dif­fer­ence in how the IRS and home owners/condo asso­ci­a­tions treat the amounts used in exte­ri­or paint­ing and oth­er main­te­nance projects like roof­ing as well as wood and sid­ing replace­ment can lead to tax­a­tion prob­lems. It’s thus impor­tant for you to under­stand the nuances of financ­ing such main­te­nance activ­i­ties to avoid any prob­lems.

Home own­ers and con­do asso­ci­a­tions con­sid­er exte­ri­or paint­ing in the same cat­e­go­ry as the oth­er main main­te­nance and con­struc­tion projects like con­crete repairs and roof repairs. These asso­ci­a­tions typ­i­cal­ly con­sid­er such expens­es as either oper­at­ing expens­es or reserve expens­es and clas­si­fy these projects as repaint­ing under reserve expen­di­ture. This makes sense giv­en that these expen­di­tures are cap­i­tal assess­ments and thus should be taxed.

The IRS dif­fers with the asso­ci­a­tions in two sig­nif­i­cant ways in rela­tion to these expen­di­tures. First, the IRS clas­si­fies expens­es as either cap­i­tal expen­di­ture or non-cap­i­tal expen­di­ture. The sec­ond dif­fer­ence is the fact that the IRS stip­u­lates that an assess­ment can be cap­i­tal in nature only if the expense’s nature must be cap­i­tal. The prob­lem aris­es because many tax court cas­es and judi­cial rul­ings cat­e­gor­i­cal­ly clas­si­fy repaint­ing and the oth­er main main­te­nance tasks that are not under­tak­en annu­al­ly as being non-cap­i­tal expens­es.

This leads to reserve con­tri­bu­tions being tax­able. Due to this, a con­do asso­ci­a­tion will most like­ly incur heavy penal­ties when amass­ing the nec­es­sary funds to under­take exte­ri­or paint­ing, roof­ing, con­crete repairs or oth­er main­te­nance work on the con­do build­ings. The eas­i­est ways that you can fund such projects with­out incur­ring high tax­es is by using Form 1120-H as opposed to Form 1120 when fil­ing returns.

Form 1120, while it has a low­er tax rate, has sev­er­al draw­backs you should con­sid­er as com­pared to Form 1120-H. It is hard­er to com­plete and due to the dif­fer­en­ti­a­tion of income expen­di­ture into non-mem­ber­ship activ­i­ties which are taxed and mem­ber­ship activ­i­ties that are not taxed. It also expos­es the asso­ci­a­tion to a tax audit giv­en it is more com­pli­cat­ed and hard­er to com­ply with. In most cas­es, con­do asso­ci­a­tions fil­ing returns using Form 1120 end up pay­ing more in tax­es. Form 1120-H is sim­pler to com­plete and cat­e­go­rizes the income into two cat­e­gories, non-exempt func­tion expense (tax­able) and exempt func­tion income (not taxed). A $100 deduc­tion where applic­a­ble fur­ther reduces the tax­es paid.

Prop­er­ly man­ag­ing the financ­ing of projects is indis­pens­able in the prop­er man­age­ment of con­do asso­ci­a­tions. Know­ing the best way to accu­mu­late the required funds helps in reduc­ing the tax­es you have to pay ulti­mate­ly and can result in major sav­ings.



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